What is Dai and how does it work?
Dai is a decentralized, stablecoin cryptocurrency created by the Maker project.
It is designed to maintain a stable value of 1 USD, and is backed by collateral held in the MakerDAO system. The MakerDAO system is a decentralized autonomous organization (DAO) that uses smart contracts on the Ethereum blockchain to create Dai. The system works by allowing users to lock up their Ether (ETH) as collateral in order to generate Dai.
This process is known as “collateralization” and it allows users to generate Dai without having to sell their ETH. Once Dai has been generated, it can be used for payments, trading, and other financial activities just like any other cryptocurrency. The key difference between Dai and other cryptocurrencies is that its value remains stable at 1 USD regardless of market fluctuations.
This stability makes it an attractive option for those looking for a reliable store of value or medium of exchange. The stability of Dai is maintained through a process called “target rate feedback mechanism” (TRFM). This mechanism works by adjusting the supply of Dai in response to changes in demand.
If demand increases, more Dai will be created; if demand decreases, less will be created. This helps keep the price of Dai pegged at 1 USD regardless of market conditions.
